Microsoft announced it is cutting 4,800 jobs—about 2.1% of its workforce—in the software company’s latest cost-cutting push. The gaming division takes the heaviest hit, with Xbox losing up to 3,200 people, or 20% of its staff, over the coming year.

The cuts reflect a seismic shift inside Xbox, the gaming arm that’s been under scrutiny for years. CEO Asha Sharma told staff the division was “operating at margins that are 3-10x lower than comparable platform and publishing businesses” and losing 64 cents for every dollar invested into studios.

Four Major Studios Getting Spun Off

Four owned studios will be sold or spun out entirely: Ninja Theory, Undead Labs, Compulsion Games, and Double Fine Productions. These studios employ roughly 350 people combined.

The restructure is the biggest in Xbox’s history, Sharma said, and signals a fundamental rethinking of how Microsoft approaches gaming. The company has been bleeding money on game development for years, unable to turn studio output into sustainable revenue streams.

What This Means for Xbox Going Forward

Layoffs in the commercial sales division account for another 1,600 cuts. Microsoft is also reshaping its salesforce as the company pivots harder toward AI and cloud computing—areas where margins are far healthier than gaming.

Xbox will still exist as a gaming service, but the days of Microsoft as a first-party game studio powerhouse are over. Expect the company to lean on third-party publishers and game pass subscriptions to drive revenue instead.

The gaming industry has already seen massive layoffs this year. Microsoft’s move signals that even the richest tech companies can’t make game development economics work at the scale they once imagined.